These are two articles from the New York Times. They are by no means radical journalism. But their ability to voice skepticism for this bailout and to point to some of the weaknesses of the proposal do begin a process for ordinary people to have some idea of the what exactly this is, yet another crisis, which is being steered to aid, not undo the consolidation of power and wealth. -rg
1. Cash for Trash
2. A Bailout Above the Law
1. Cash for Trash
September 22, 2008
OP-ED COLUMNIST
By PAUL KRUGMAN
Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.
There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.
Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.
So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:
1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.
2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.
3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”
The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?
Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.
Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?
The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.
That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)
But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.
I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.
But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.
2. A Bailout Above the Law
September 23, 2008
DEALBOOK
By ANDREW ROSS SORKIN
The passage is stunning.
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency,” the original draft of the proposed bill says.
And with those words, the Treasury secretary — whoever that may be in a few months — will be with vested with perhaps the most incredible powers ever bestowed on one person over the economic and financial life of the nation. It is the financial equivalent of the Patriot Act.
Treasury Secretary Henry M. Paulson Jr.’s $700 billion proposal to bail out Wall Street is both the biggest rescue and the most amazing power grab in the history of the American economy.
In many ways, it is classic Wall Street: a big, bold roll of the dice that one trade can save the day. But at the same time, the hypocrisy is thick. The lack of transparency and oversight that got our financial system in trouble in the first place seems written directly into the proposed bill, known as TARP, or the Troubled Asset Relief Program.
Just take a look at the original draft: “The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this act,” the proposed bill read when it was first presented to Congress, “without regard to any other provision of law regarding public contracts.”
It goes on to say, “Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.”
Slowly but surely, as new versions of the bill are making the rounds in Washington, some legislators are pressing to include new language to give them at least a modicum of oversight. Democrats have complained that the bill gives the Treasury Department “a blank check” — and they’re right.
But given the rush to push the bill through, even if Congress cobbles together some oversight language, it will almost surely be inadequate. Joshua Rosner, a managing director at Graham Fisher & Company, says TARP should stand for “Total Abdication of Responsibility to the Public.” He says it is “a clear abdication of all Congressional oversight and fiscal authorities to a secretary of Treasury that has bungled this crisis from the beginning.”
He argues that the bill grants “greater powers to the secretary of the Treasury than even the president enjoys.”
The bigger issue is that the bill effectively creates protections not just for the Treasury, but for the executives on Wall Street who created this near Armageddon. Mr. Rosner says that the draft bill “prevents judicial review that could allow the protection of decisions that create false marks, hide prior marks, or could be used to prevent civil or criminal prosecution in situations where a management knowingly provided false marks that aided the growth of this crisis of confidence.”
False marks — using mark-to-market accounting to hide the true value of security, rather than disclose it honestly — has a lot to do with why Jeffrey Skilling, the former Enron chief executive, is in jail.
It is absolutely true, of course, that Mr. Paulson needed to do something. By Thursday afternoon, less than 48 hours after the bailout of the American International Group, the financial system was near meltdown. The mere rumor that Mr. Paulson and the Federal Reserve chairman Ben Bernanke were devising a big bailout fund cause the stock market to soar.
In truth, I’m not sure I agree with Mr. Rosner’s assessment of Mr. Paulson’s job performance. I think he is one of the most competent Treasury secretaries we’ve ever had, and it is hard to imagine anyone else handling this crisis any better. His predecessors, who lacked his grounding in the world of high finance, would most likely have been like deer in headlights.
And when Mr. Paulson says, as he did on all the talk shows on Sunday, “I hate the fact that we have to do it, but it’s better than the alternative,” I believe him. (It would have looked better, of course, if he had come up with this plan before it looked as if his former firm, Goldman Sachs, was in jeopardy.)
But the question on the table now is whether the government’s latest response to this crisis — the way it has been constructed, and frankly, the way it is being crammed down everyone’s throat at the eleventh hour — is the right approach. Already the market has its doubts; just look at its performance on Monday.
Let put aside the bill’s most offensive aspect — the raw power it gives the Treasury Department, and the lack of oversight it provides — and take a closer look at the practicalities. First off, there is nothing in the bill that will prevent these problems from happening again. The bill doesn’t address adding greater transparency in investments in subprime loans and securities and credit derivatives, which led directly to the debacles at Lehman and A.I.G. The bill does nothing to rein in the credit-default swap market, which has turned out to be the weapon of financial mass destruction that Warren Buffett always said it was.
Nor are the Democrats going to help matters with their own changes. It is all well and good that they hope to use the bill to restrain executive compensation, and add stipulations to help people in danger of losing their homes. But nothing the Democrats have suggested so far tackles the core issues of oversight, transparency or regulation.
Of course, the sickest part is that Wall Street is lining up at the trough for a piece of the action, lobbying to run some of the $700 billion fund — and take huge fees — for their own mess.
However the bailout is structured, no matter what safeguards are put in place, it is likely to be a conflicted mess. How can we possibly trust that the price the government agrees to buy the securities will be fair?
And then there is the jockeying among the banks so they can sell their absolute worst stuff to the government — even loans that have nothing to do with mortgages — and change the rules in the process. The Financial Services Roundtable, which represents big financial services companies, wrote an e-mail message to members on Sunday suggesting, laughably, that “the government bid for the assets should not count as a mark-to-market value for accounting purposes.”
In other words, if the government drives a hard bargain — as it should — the banks don’t have to take write-downs based on the price the feds pay to take junk off their balance sheets.
Watching Wall Street double-dip makes even some in the industry’s top tier cringe.
“Maybe I should move to Russia,” one titan of finance said to me. “It’s obscene, the whole thing. I’m embarrassed for myself.”
Actually, I’ve got a better suggestion: Venezuela.
On Friday last week, Hugo Chávez, the Socialist president of Venezuela, gave a speech in Caracas where, according to Reuters, he said, “The United States has spent $900 billion, four times what the Venezuela produces in a year, to try to boost the troubled finance system and housing market.”
Gloating, he added: “They have criticized me, especially in the United States, for nationalizing a great company, CANTV, that didn’t even cost $1.5 billion.”
Copyright 2008 The New York Times Company
